The United States’ shocking turn against Ukraine has finally brought Europe’s previously academic debate on immobilized Russian sovereign assets to the fore. Since Ukrainian President Volodymyr Zelensky’s humiliation in the Oval Office in late February and U.S. President Donald Trump’s temporary pause on all weapons deliveries to Ukraine, an implicit European taboo on seizing the assets and transferring them to Kyiv has been broken.
Days after the start of the full-scale invasion of Ukraine, the Group of Seven agreed to block the Russian Central Bank’s access to the $300 billion monetary reserves that it still held in the West—mainly in Europe and Japan. Russia’s National Welfare Fund’s holdings were also affected. Russia had predominantly been parking its cash in safe sovereign debt, which it was purchasing through the Belgium-based central securities depository Euroclear. The sum of 183 billion euros ($197.6 billion) that has accumulated there is made of more than 10 currencies, including U.S. dollars.
The United States’ shocking turn against Ukraine has finally brought Europe’s previously academic debate on immobilized Russian sovereign assets to the fore. Since Ukrainian President Volodymyr Zelensky’s humiliation in the Oval Office in late February and U.S. President Donald Trump’s temporary pause on all weapons deliveries to Ukraine, an implicit European taboo on seizing the assets and transferring them to Kyiv has been broken.
Days after the start of the full-scale invasion of Ukraine, the Group of Seven agreed to block the Russian Central Bank’s access to the $300 billion monetary reserves that it still held in the West—mainly in Europe and Japan. Russia’s National Welfare Fund’s holdings were also affected. Russia had predominantly been parking its cash in safe sovereign debt, which it was purchasing through the Belgium-based central securities depository Euroclear. The sum of 183 billion euros ($197.6 billion) that has accumulated there is made of more than 10 currencies, including U.S. dollars.
The Biden administration started to push in favor of seizing the assets only once it began to struggle to pass new funding for Ukraine through Congress in September 2023. It generally argued that the funds should be for Ukraine’s reconstruction, not the war effort. In May last year, the European Union did agree to tax almost all the interest income accruing to holders of Russian sovereign and spend it on Ukraine’s defense and other assistance. But its main capitals have staunchly opposed seizure so far.
Could a shift be afoot?
Former French Prime Minister Gabriel Attal, who still has a few bones to pick with President Emmanuel Macron, has whipped his parliamentary group into voting through a bill that supports seizure, in direct contradiction with the French government’s cautious stance. The incoming German chancellor, Friedrich Merz, is said to be more interested in creative approaches than outgoing Chancellor Olaf Scholz. The Baltic states’ and Poland’s dissent from the EU position is becoming more vociferous. The same Biden administration officials who pushed for seizure have sensed a moment; former national security advisor Philip Gordon boldly argued in the Financial Times in early March that Europe has “no choice” but to seize the assets.
But while the momentum appears on the side of the asset-seizers, especially since the disaster between Trump and Zelensky in the Oval Office, the concerns that stood in the way so far haven’t gone away. In fact, with poor prospects for G-7 coordination under Trump, the causes for caution have become even more concrete and more of an obstacle.
First, the risks of setting a bad precedent are not overblown. It is the trust in the legal systems governing G-7 currencies that makes them uniquely suitable for allies and non-allies alike to allocate into their monetary reserves and, for the lucky ones, sovereign wealth funds. And while alternative storage options for such pools of liquidity haven’t successfully been established yet, the proposed move will be a signal to all governments that they need to double down on finding and creating them.
Serious market commentators are beginning to argue that the unpredictability of Trump’s United States may deprive the U.S. dollar of its prime safe-haven status. This may well drive more demand toward euro-denominated assets, but European policymakers should not be complacent and assume that the quest for safe assets allows them to take risks with trust in their system. And the seizure of Russian assets would mainly stain the reputation of the European system, where most of those assets are stored.
Long-standing debates on the EU’s fiscal firepower may seem to be an incongruous argument to bring up as Ukraine fights on, now in its fourth year of repelling Russia’s latest aggression. But this is a promising moment where European and German policymakers are finally delivering on long-overdue reforms to borrow and spend more on defense, including Ukraine’s.
In Germany alone, reforms squeezed through in mid-March—before the newly elected parliament comes in—will allow unlimited deficit spending on defense and the creation of a 500 billion euro ($540 billion) special fund for infrastructure. This has already driven up borrowing costs for Germany, but its EU neighbors—whose debts are benchmarked against Germany’s—also fear that their debt servicing costs will increase.
In Brussels, the current proposals are limited to relaxing borrowing rules for member states to reach their defense spending commitments faster as well as providing up to 150 billion euros ($162 billion) of loans from the European Commission to member states. Heavily indebted member states are instead pushing for defense bonds to be issued by the EU and for the funds to be distributed as grants. In any case, this is not the time to upset global trust in European sovereign debt—exactly the type of instrument that Russia was using to store its cash.
Now that the United States is more interested in dialogue with Moscow, it is impossible to imagine a coordinated move by the G-7 on seizure. At this point, if the EU were to seize Russia’s assets, it might still be able to count on the U.K. and Canada to follow suit, although neither have said that they would support such a move without G-7 coordination. Japan has applied the immobilization of Russian sovereign assets, but it is highly skeptical of taking any further steps. In other words, the jurisdictions that chose to go ahead would be shooting themselves in the foot.
They remain unlikely to do so, even under growing internal pressure. However, it seems that European leaders have realized that their control of the bulk of the immobilized assets also gives them the means to wade their way into negotiations.
Moscow and Washington would prefer to negotiate over the heads of the EU and the Ukrainians, but the United States alone cannot make any threats or promises on the fate of Russia’s immobilized assets. The EU can. The “trip wire” plan floated by France, under which the EU would threaten to seize if Russia doesn’t respect a cease-fire, should be seen in this light.
While understandable, it is also important that any efforts to bring the assets into peace talks respect certain rules. Even skeptics of seizure agree that the money should not go back to Russia and should eventually be used as an offset for Ukraine’s claim against Russia. We should be wary of Russia’s attempts to muddy the waters, as with Moscow’s call in early March for the assets to be used for reconstruction in the regions of Ukraine that Russia currently occupies. Russia would be much more likely to use the substantial sum to prepare for its next attack, perhaps on an EU member state.
Nor should anything like offering to return the assets upset the elegant compromise of the G-7 extraordinary revenue acceleration (ERA) loans, which will be repaid using interest revenue from the immobilized assets over coming years.
Former World Bank President Robert Zoellick has mistakenly argued that using the interest should be no different from seizing the principle. The contracts that Euroclear and other central securities depositories have with their Russian clients allow the company to make profits off the cash that they hold for them, so the difference is quite clear.
The additional $50 billion that Ukraine will receive this year thanks to the ERA loans compromise represents more than half of the country’s annual budget and are an undercelebrated achievement. The G-7 countries struggled to figure out how they’d share the risk because the income stream mainly relied on sanctions staying in place. It is therefore difficult to see anything more ambitious—such as a proposal to mobilize the assets as a $300 billion reparation loan—would work, but all alternatives to seizure should continue to be studied carefully.
Europe is at a highly delicate moment. The urgent need to increase defense spending coincides with a global reappraisal of whether Washington can be trusted to act rationally. While European assets are becoming more attractive, complacency would be a mistake.
Rather than seizing Russian assets and creating a precedent which would put the euro at another disadvantage next to the U.S. dollar, the EU should do everything else in its power, including through more borrowing, to strengthen Ukraine’s position as well as its own.
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